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Why can’t we get the APR rates we’re offered?

Pile of credit cards

Working out how much interest you’re being charged on your credit card isn’t as easy as it might appear. So why have recent changes missed the opportunity to sort out the mess and make things good?

While most of us rely on comparing the advertised annual percentage rates (APRs), there’s little consistency in how companies calculate these.

As a result, two cards that claim to have the same APR may in fact end up charging quite different amounts of interest on the same amount of debt.

Some companies, for example, offer longer interest-free periods than others each month. Meanwhile, certain cards calculate interest based on daily balances, while others base the calculation on average monthly balances.

OFT needs to do more

We’ve been campaigning to get the law changed for some time. In fact, in 2007, we even used the special powers invested in us by the government to make a ‘super complaint’ – forcing the Office of Fair Trading (OFT) to take a look at the matter.

But while the OFT agreed with us that there was a serious problem, the remedies that it proposed – which centred around improvements in the information that’s available to customers – are either not working or have not even been implemented.

Unwelcome EU changes

At the end of January, new European laws came into force in the UK, which have only served to make the problem worse. The rules include some new stipulations about the assumptions that companies must make when they’re calculating the APR on a card.

Yet they haven’t addressed many of the problems that we identified four years ago. Most of the inconsistencies around APRs will remain, and the calculations are now, arguably, even more confusing when it comes to fee-charging cards.

Another unwelcome change is a reduction in the proportion of people who need to be offered the advertised ‘typical APR’ when they apply for a card.

Previously, card companies had to offer this rate to two-thirds of new customers – now they only need to offer it to 51%, leaving them to charge much more to the remaining 49%.

The introduction of new regulation was the ideal opportunity to standardise the way that interest is calculated so that credit card customers can have confidence that the rate they see is the rate they get.

Sadly, European legislators and the OFT have missed yet another opportunity to clear up the confusion.